Sappi Limited (JSE:SAP) News - Fourth quarter results for the period ended September 2021

Sappi Limited
Registration number: 1936/008963/06
JSE code: SAP
ISIN code: ZAE000006284
Issuer code: SAVVI

Fourth quarter results for the period ended September 2021


Short-form SENS announcement

                                            Quarter ended                        Year ended
US$ million                              SEP 2021   Sep 2020         %      SEP 2021    Sep 2020         %

Sales                                        1 425         1 092     30%         5 265       4 609       14%

EBITDA excluding special items                 177            82    116%           532         378       41%

Profit for the period                           35          (88)     N/A            13        (135)      N/A

Net debt                                     1 946         1 957     -1%         1 946       1 957       -1%


Headline EPS (US Cents)                          9          (14)     N/A             5         (19)      N/A

Basic EPS (US Cents)                             6          (16)     N/A             2         (25)      N/A

EPS excluding special items (US Cents)          11           (4)     N/A            15          (5)      N/A

Net asset value (US Cents)                     351           299     17%           351         299       17%




Sappi is a leading global provider of powerful everyday materials made from woodfibre-based
renewable resources. Together with our partners, we are quickly moving toward a more
circular economy.

Our raw material offerings (such as dissolving pulp, wood pulp and biomaterials) and end-use
products (packaging and speciality papers, graphic papers, casting and release papers and
forestry products) are manufactured from woodfibre sourced from sustainably managed
forests and plantations, in production facilities powered, in many cases, with bio-energy from
steam and existing waste streams. Many of our operations are energy self-sufficient.

Sappi works to build a thriving world by acting boldly to support the planet, people and
prosperity.


Commentary on the quarter
The ongoing recovery from Covid-19 continued in the fourth quarter. High DP prices and an
excellent performance by the North American region more than offset escalating raw material
costs and ongoing supply chain challenges, which constrained shipments and negatively
impacted delivery costs. Consequently, group EBITDA excluding special items of US$177
million was a further increase on the US$145 million achieved in the third quarter.

VSF prices dropped during the quarter due to higher inventory levels and a delay in the
seasonal upswing in demand ahead of the Chinese National Holidays in October. This had a
corresponding impact on the hardwood DP market price, notwithstanding it remained above
US$1,000 per ton due to various DP supply side constraints, including unforeseen mill outages
and the ongoing global supply chain challenges. DP sales volumes for the quarter of 263,000
tons, which included 37,000 tons of high yield BCTMP pulp, were significantly below
expectations. The supply chain disruptions including global port congestion, inefficiencies in
the Durban port and limited vessel availability were responsible for this shortfall. Despite the
lower sales volumes compared to the prior quarter, the EBITDA for the segment increased by
38% due to beneficial pricing which peaked in the third quarter and formed the basis of fourth
quarter contract prices.

Sales volumes in the packaging and speciality papers segment increased 10% compared to
the equivalent quarter in the prior year as the North America region experienced encouraging
sales growth and margin improvement across all of the major product categories. EBITDA for
the segment improved 21% compared to last year.

Graphic paper demand continued to recover and, combined with industry capacity closures,
ensured the market balance in Europe and North America was restored to healthy levels.
However, profitability in Europe remained a challenge due to inflationary cost pressures. Low
industry inventory levels and longer delivery lead times linked to the global supply chain
challenges provided support for price increases during the quarter.

Earnings per share excluding special items for the quarter was 11 US cents, which was a
substantial improvement on the 5 US cents in the prior quarter and indicative of the recovery
of profitability for the group.

Cash flow and debt

Net cash generated for the quarter was US$33 million, compared to US$88 million in the
equivalent quarter of last year and US$49 million in the prior quarter. The decrease was
primarily as a result of increased capital expenditure of US$143 million related mainly to the
expansion of DP capacity at Saiccor Mill.

Net cash generated for the financial year was US$29 million (FY2020 US$257 million utilised).
The improvement in cash generation was largely due to the recovery of sales volumes and
improved profitability. The prior year also contained the acquisition of the Matane Mill.

Net debt at financial year end decreased to US$1,946 million (FY20 US$1,957 million) as a
result of the cash generation. The covenant leverage ratio at year end reduced substantially
from a peak of 6.7 in the second quarter to 3.7 at year end and is expected to continue to
reduce progressively as the low EBITDA Covid-19 impacted quarters are eliminated from the
calculation. At year end, liquidity comprised cash on hand of US$366 million and US$732
million from the committed revolving credit facilities (RCF) in South Africa and Europe.

Outlook

Overall market conditions for DP continue to be strong. However, short-term demand in China
is impacted by the recent implementation of energy savings regulations which impose
curtailments for energy intensive manufacturing operations across the country. The textile
value chain has been negatively impacted thereby reducing VSF production and DP demand.
Consequently, DP market prices dropped to US$940 per ton in October. However, lower VSF
supply and a widening price differential to cotton fuelled a significant rise in VSF pricing, which
should be positive for DP pricing. Sappi’s sales volumes are not expected to be impacted by
the weaker Chinese DP demand.

The recovery of demand for graphic paper combined with industry capacity closures has
tightened the market balance. In North America, ongoing restrictions on imports due to global
supply chain disruptions have further contributed to a positive environment in this region. The
underlying demand in the packaging and specialities segment remains robust in both the North
American and South African regions and opportunities for further growth in sales volumes
exist in Europe. The scheduled Somerset annual maintenance shut, which includes an
extended statutory cold outage, will have an estimated US$22 million impact on profitability in
the first quarter.

Recent spikes in global energy prices for gas, power and coal are anticipated to have an
adverse impact on our first quarter results, principally in Europe. To offset rising costs, we
have announced selling price increases across all paper grades. In addition, energy specific
surcharges have been implemented for all European shipments from 25 October 2021.

Global logistical challenges and vessel shortages are expected to continue through FY2022,
which may have an ongoing negative impact on our export sales. It is unlikely that any
significant improvement in supply chain reliability will be realised in the first quarter and hence
the backlog of 100,000 tons of DP sales volumes will take time to resolve.

Capital expenditure in FY2022 is estimated to be US$395 million and includes approximately
US$30 million of Saiccor Mill expansion capex, US$80 million for cost optimisation and quality
improvement projects and US$75 million for sustainability projects.

The first quarter of FY2022 will comprise 14 weeks instead of the typical 13-week quarter.
This is in order to adjust our reporting periods closer to the calendar periods and will result in
increased sales compared to comparative quarters.

We remain encouraged by the growing resilience of global economies as the Covid-19
pandemic evolves and the corresponding recovery in underlying demand in all of our product
segments. However, the supply chain challenges and the extraordinary cost inflation may
affect profitability. In addition, the maintenance shut at Somerset Mill is scheduled for the first
quarter and will impact EBITDA. Taking these factors into account, we anticipate a further
improvement in EBITDA for the first quarter of FY2022 relative to the fourth quarter of FY2021.
On behalf of the board

S R Binnie
Director

G T Pearce
Director

11 November 2021


Short form announcement

This short-form announcement is the responsibility of the directors. It is only a summary of the
information in the full announcement and does not contain full or complete details. Any
investment decision should be based on the full announcement accessible on 11 November
2021 via the JSE link and also available the sappi website at www.sappi.com.

Copies of the full announcement may be requested by contacting Jeanine Olivier on
telephone: +27 (0)11 407 8307, email: Jeanine.Olivier@sappi.com.

The JSE link is as follows:

https://senspdf.jse.co.za/documents/2021/jse/isse/SAVVI/sappiQ421.pdf



JSE Sponsor: UBS South Africa (Pty) Ltd

Date: 11-11-2021 11:20:00
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